Custom, Excise & Service Tax Tribunal
Aztecsoft Ltd (Presently Known As M/S. ... vs Commissioner Of Central Tax, Bengaluru ... on 3 July, 2024
CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL
BANGALORE
REGIONAL BENCH - COURT NO. 1
Service Tax Appeal No. 1486 of 2011
(Arising out of Order-in-Original No. 8/2011 dated 21.03.2011 passed
by the Commissioner of Central Excise, Bangalore-II Commissionerate,
Bangalore.)
M/s. Aztecsoft Limited
(Presently known as M/s. Mind Tree Limited) Appellant(s)
Global Village, RVCE Post,
Mysore Road,
Bangalore - 560 059.
VERSUS
The Commissioner of Central
Excise
Bangalore-II Commissionerate,
P.B. No.5400, C.R. Building, Respondent(s)
Queens Road, Bangalore - 560 027.
APPEARANCE:
Shri N. Anand, Advocate for the Appellant Shri Dyamappa Airani, Authorised Representative for the Respondent CORAM: HON'BLE DR. D.M. MISRA, MEMBER (JUDICIAL) HON'BLE MRS. R. BHAGYA DEVI, MEMBER (TECHNICAL) Final Order No. 20528 / 2024 DATE OF HEARING: 05.01.2024 DATE OF DECISION: 03.07.2024 PER : R. BHAGYA DEVI This appeal is filed against Order-in-Original No. 8/2011 dated 21.03.2011.Page 1 of 22
2. The appellant, M/s. Aztecsoft Ltd., is engaged in providing software products, engineering services and also involved in design, development, testing and acceptance of projects. On investigation, it was found that the appellant was also engaged in deputation of their employees to other companies on monthly payment basis which was in the form of 'manpower supply service'. Thus, the Commissioner in the impugned order classifying the above services under the category of 'Manpower Recruitment or Supply Agency Service' as defined under Section 65 of the Finance Act, 1994 demanded and confirmed duty amount of Rs. 1,12,86,898/- along with interest and equal amount of penalty for the period June 2005 to March 2007. In addition, the services provided by an overseas service provider in terms of the Selling Agreement and Master Agreement was classified under the category of 'Business Auxiliary Service' (BAS) under Section 65 of the Finance Act, 1994 for the period from July 2003 to March 2007; an amount of Rs.4,69,45,582/- was demanded and confirmed under the category of Business Auxiliary Service along with interest and equivalent amount of penalty. Aggrieved by this order, the appellant has filed the present appeal.
3. The Learned Counsel on behalf of the appellant, made the following submissions.
a) The Appellant is a 100% Export Oriented Unit-Software Technology Park (EOU-STP) unit engaged in the development of embedded software and other software related services and mainly exports their services. During the period of dispute, the Appellant had provided embedded software development and other Information Technology (IT) related services to the customers in India by entering into "software outsourcing contracts" with its customers. The Department on the basis of Master Services Agreement dated 07.12.2005 entered with M/s. Philips Electronics India Limited (PEIL) had Page 2 of 22 confirmed the Service Tax under the category of 'Manpower Recruitment or Supply Agency Service'. DGCEI investigations held that the Master Service Agreement (MSA) entered by the Appellant with M/s. Philips Electronics India Ltd. in respect of "Time and Materials Projects" was in the nature of 'Manpower Recruitment or Supply Agency Service' and hence liable for payment of Service Tax w.e.f. 16.05.2005. In addition, the Directorate General of Central Excise Intelligence (DGCEI) also alleged that the Appellant had entered into two agreements viz., "Selling Agreement" and "Master Agreement" both dated 01.04.2001 with M/s. Aztec Software Inc., USA and the consideration paid by the Appellant was liable for payment of Service Tax under Reverse Charge Mechanism (RCM) as Business Auxiliary Service under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994.
b) The Appellant was under bona fide belief that software services rendered to customers in India including M/s. Philips Electronics India Ltd. being "information technology services"
was not taxable under any of the existing service category in as much as "consulting engineer" service as defined in section 65(31) read with Section 65(105)(g) of Finance Act, 1994 and the services in relation to 'computer software' was either exempted from payment of Service Tax vide notification No.4/99-ST dated 28.02.1999 which was in force up to 10.09.2004 or excluded from the "taxable service"
definition in Section 65(105)(g) post 10.09.2004 which was in force till 16.05.2008. He further submits that definition of BAS in Section 65(19) excluded "information technology service", etc. Thus, till the Parliament enacted the Finance Act, 2008, the Information Technology Service was never construed as taxable service under Section 65(105) of the Act.
Page 3 of 22c) The Parliament has specifically kept "information technology service" outside the purview of levy of service tax. It is only w.e.f. 16.05.2008, the Parliament inserted new taxable service category - "Information Technology Software Services" (ITSS) under Section 65(105)(zzzze) and also made suitable amendments in the other service categories like consulting engineer; BAS; Maintenance or Repair Service, etc., to specifically provide levy of service tax on the above category. Thus, this clearly establishes that there was no intend by the Parliament to impose and demand service tax in respect of "information technology service" prior to 16.05.2008. Hence, the impugned order is not tenable in re- classifying the services as "manpower supply".
d) There is no difference and distinction between (a) Fixed Price Projects and (b) Time & Material Projects rendered under MSA with M/s. Philips Electronics India Ltd., Both the projects were executed and performed under various terms and conditions as per MSA with M/s. Philips Electronics India Ltd. and both are in relation to "information technology service projects". Hence, the Appellant has not rendered mere "manpower supply" services as held in the impugned order. It is well settled that the contract/agreement has to be read and interpreted in whole and not in bits and pieces. Reliance is placed on the judgment of the Honorable Supreme Court in the case of State of Gujarat v. Variety Body Builders: AIR 1976 SC 2108, 2110 wherein it was held that - "It is well settled that when there is a written contract it will be necessary for the Court to find out there from the intention of the parties executing the particular contract. That intention has to be primarily gathered from the terms and conditions which are agreed upon by the parties". He also Page 4 of 22 relied on the decision of the Hon'ble High Court of Bombay, in the case of CIT v. Information Architects: [2010] 322 ITR 1 (Bom.) in the context of Section 80HHE of the Income tax Act, 1961, wherein it was held that the activity of deputing software professionals by the assessee to foreign clients tantamount to rendering "technical services" in relation to computer software and the same is entitled for deduction under Section 80HHE. He also relied on the decision of the Tribunal in the case of Cognizant Tech Solutions (I) Pvt Ltd v. Commissioner: 2010 (18) STR 326 (Tri-Che.).
e) It is further submitted that the Appellant had rendered services in relation to information technology service/ computer software services even in respect of T&M Projects and merely because the Purchase Orders issued by M/s. Philips Electronics India Ltd. does not specify deliverables/delivery of software programme, such projects do not cease to be Information Technology related services. It is submitted that impugned order is opposed to Section 65A i.e., classification of taxable services. It is further submitted that the entire investigation by DGCEI and the show-cause notice was issued solely on the basis of MSA dated 07.12.2005 entered with M/s. Philips Electronics India Ltd. and the impugned order is only based on presumptions and assumptions in as much as the said MSA has been relied upon for the period prior to 07.12.2005 and also for various other customers for the entire period and is not in accordance with the decision in the case of Oudh Sugar Mills Ltd v. UOI: 1978 (2) ELT 172 (SC).
f) With regard to the demand of Service Tax under RCM under BAS, it is submitted that there is no levy of service tax prior to 18.04.2006 i.e., prior to insertion of Section 66A of the Finance Act, 1994. Reliance is placed on the decision in the Page 5 of 22 case of Indian National Shipowners Association v. UOI: 2009 (13) STR 235 (Bom.) affirmed by Apex Court in 2010 (17) STR J57 (SC), which is accepted by the Board vide its Circular F.No.276/8/2009-CX.8A dated 26.09.2011. As regards post 18.04.2006 in respect of the second Agreement titled "Master Agreement", it is the submission of the Appellant that the services rendered by the foreign service provider is not classifiable under BAS ("provision of service on behalf of the client") since the definition of BAS specifically excludes "information technology service" from the inception i.e., 01.07.2003 till 16.05.2008. Hence, the demand of tax under RCM under BAS for the period from 18.04.2006 to 31.03.2007 cannot be sustained in law. In this regard, the Appellant place relied on the decision in Suntec Business Solutions Pvt Ltd v. CCE: 2017 (51) STR 446 (Tri- Bang.); CST v. IBM India Pvt Ltd, 2021 (47) STR 7 (Kar.) and Kasturi & Sons Ltd v. UOI, 2011 (22) STR 129 (Mad.). Hence, the demand under both the above agreements dated 01.04.2001 prior to 18.04.2006 and for the period post 18.04.2006 cannot be sustained under the category of BAS.
g) With regard to extended period of limitation, the Appellant further submits that the demands confirmed are also barred by limitation in as much as there was no willful suppression of facts or contravention of the provisions of the Act with intend to evade payment of Service Tax since the appellants were under a bona fide belief that the services in dispute are classifiable under "information technology service" in relation to computer software which was either exempted from payment of service tax or was excluded from the definition of taxable service(s). The entire issue revolves around genuine interpretation of statutory provisions in as much as it involves classification of service. The Appellant also submits that imposition of various penalties including equal amount Page 6 of 22 of penalty under Section 78 is not justifiable. The Appellant places reliance on the decision of the Supreme Court in the following cases:
➢ Continental Foundation Joint Venture v. CCE, 2007 (216) ELT 177 (SC) ➢ CCE v. Chemphar Drugs & Liniments, 1989 (40) ELT 276 (SC).
➢ Jaiprakash Industries Ltd v. CCE, 2002 (146) ELT 481 (SC).
4. The learned Authorized Representative for the Revenue submitted that the Appellants were engaged in software product engineering services and other projects. Investigations conducted by DGCEI revealed that the Appellants were also engaged in deputation of their employees to other IT companies, on monthly payment basis, for IT Project work under the control of their clients. As per Master Service Agreement dated 07.12.2005, the Appellant entered into an agreement with Client M/s. Philips Electronics India Ltd. (PEIL), for two types of projects, viz., "Fixed Price Project" and "Time and Materials Project". As per Clause 1(f) of the said Agreement, "Fixed Price Project" means a project undertaken under the agreement for a Fixed Price and under which the project is controlled by the Appellant and the deliverables are specified in the Statement of Work for the same. As per Clause 1(g) of said Agreement, "Time and Materials Project" means a project under which Appellant has provided its personnel to provide services on an effort basis under which the project is controlled by M/s. Philips Electronics India Ltd. and no deliverables are specified in the Statement of Work for the same. The nature of services provided under the "Time and Materials Project" indicated that the services are chargeable to Service Tax under the category of 'Manpower Recruitment and Supply Agency Service' taxable w.e.f. 16.05.2005.
4.1. It is further stated that in a statement recorded by the DGCEI on 10.10.2006, Sri Sridhar V, Executive (Purchase) of M/s.
Page 7 of 22Philips Electronics India Ltd., with reference to 'Time and Materials Project' stated that the development of software / testing is taken up by M/s. Philips Electronics India Ltd. under the control of Project Manager of M/s. Philips Electronics India Ltd. The indents specifying the skills and number of personnel required for such projects are received from the Project Manager of M/s. Philips Electronics India Ltd. and accordingly, the purchase orders for the supply of personnel with required skill were placed on the suppliers i.e., the Appellant. In Time and materials project, the personnel provided by the suppliers will be working under the Project Manager of M/s. Philips Electronics India Ltd. and will be engaged in the development of software / testing along with other professionals of M/s. Philips Electronics India Ltd. The projects are fully controlled by Project Manager of M/s. Philips and the personnel provided by the suppliers will be only working under him and as per the directions given by him. In some projects, the suppliers supplement the personnel provided with the knowledge or the updation of the skill required for that project. In all such projects, the supplier's responsibility is limited to supply of personnel with required skill. In case of each requirement, the supplier will give the list of personnel with their skill, qualification and experience, based on which they interact with those personnel and only after they are satisfied that personnel are up to their mark, purchase orders are placed on the suppliers specifying the name of the personnel required. As per the rates specified in the purchase orders, the billing is made by the supplier on monthly basis and the payments are accordingly made. The Clause 1(g) of the Master Agreement dated 07.12.2005 supports the statement given by above Executive Officer.
4.2. It is submitted that the impugned order clearly held that the Appellant had supplied manpower to the clients who are required to function under the control of the said clients. The manpower supplied by the Appellant were used for software Page 8 of 22 consultancy or software development, but the role of the Appellant is limited to supply of skilled manpower. The Clients were reimbursing Appellant for the supply of manpower, the amount reimbursed is for the personnel supplied and not for the software and hence, the service involved is manpower supply, which is the predominant or essential character of the service involved, in terms of Section 65A of Finance Act, 1994.
4.3. He further submits that the Hon'ble Supreme Court of India in case of C.C./C.E & S.T., Bengaluru (Adjudication) vs. M/s. Northern Operating Systems Pvt. Ltd. [2022(61) G.S.T.L. 129(SC)], on the issue of classification of supply of skilled personnel from one company to another, under a contract has held that such supply of manpower is classifiable as 'Manpower Supply Service" and a taxable service. In the case of M/s. Coromandel Infotech India Ltd. vs. Commissioner of GST & CE, Chennai South:
[2019 (1) TMI - CESTAT-Chennai] involving supply of personnel from the Appellant to M/s. Infosys & other clients, it was held by the Hon'ble CESTAT, at para 6, as under :
"6. From the facts on record it is seen that the appellant had supplied personnel to M/s. Infosys and other clients as per requirements of the latter. These personnel are utilized for development, enhancement, implementation and maintenance of software projects. It is also pertinent to note that such development, enhancement, etc., of software is not assigned to the appellants themselves, but is done only by M/s. Infosys and the other clients. No doubt, the personnel so supplied may well be qualified software personnel. Nonetheless, once such personnel have to function under the overall supervision, control and management of the client, the appellant is only providing services of Manpower Supply."
4.4. In addition, the Revenue relies on the following decisions where similar services of supply of personnel were held to be classifiable under the category of 'Manpower Recruitment and Supply Agency Service'.
Page 9 of 22(i) M/s. Future Focus Infotech Pvt Ltd Vs Commissioner of C.Ex (ST), Chennai-IV [2018(18)GSTL 441(Tri-Chennai)],
(ii) M/s. Future Focus Infotech Pvt Ltd Vs Commissioner of C.Ex (ST), Chennai-IV [2010(18) STR 308 (Tri-Chennai)],
(iii) M/s. Talking Technology (P) Ltd Vs the Commissioner of Service Tax, Chennai [2020 (3) TMI 315 - CESTAT Chennai] 4.5. With regard to Business Auxiliary Service, it is submitted that during the DGCEI Investigation, it was also noticed that the Appellant Company had been paying certain amounts as commission in foreign exchange to M/s. Aztec Software Inc., USA (overseas service provider having no office in India) who were engaged as overseas agent of the Appellant for promotion / marketing of goods / services of the Appellant in USA. The said activities / services received were in the category of taxable service and leviable to service tax w.e.f. 01.07.2003 under the category of 'Business Auxiliary Service'. The investigations revealed that the both the above services were provided / received as per terms and conditions under valid agreements between the parties. The impugned order examined the classification / taxability of the services involved and held that the services were received for promotion or marketing of goods from foreign clients and the services received from the overseas clients are classifiable under the category of Business Auxiliary Service under Section 65(19) of Finance Act, 1994. The said services were received by the Appellant under the terms and conditions specified under an Agreement between them and their overseas clients. The Appellant had not disputed the said facts and also the aforesaid classification, but disputed the taxability on the plea that the services were received outside India and are not taxable. This issue has been examined and found that the services were received by the Appellant who have a permanent establishment only in India and that the services received by them outside India are taxable. As per findings of the Adjudicating Authority, Appellant, who are the recipient of the said taxable services were Page 10 of 22 liable to pay the taxes in terms of Rule 2(1)(d)(v) of Service Tax Rules, 1994 (prior to 18.04.2006) and in terms of Section 66A of Finance Act, 1994 (w.e.f. 18.04.2006). They placed reliance on the following decisions:
(i) Air India Limited Versus Commissioner of Service Tax, Delhi [2018 (8) GSTL 386 (Tri-Delhi)
(ii) Macmillan India Limited Versus Commissioner of Service Tax [2018 (8) TMI 496 - CESTAT Bangalore] 4.6. Regarding limitation, it is stated that as per statutory provisions, the Appellants were liable to pay Service Tax on the 'Manpower Supply Services' provided by them and on the 'Business Auxiliary Services' received by them. Further, as receiver of service, they were liable to discharge Service Tax on the charges paid to the overseas service provider in terms of Section 66A of the Finance Act, 1994. The Appellant were fully aware of their liabilities but chose to suppress the facts and evade payment of Service Tax. The omissions of the appellant would not have come to light had it not been for the investigations conducted by the DGCEI. The appellant was aware of the nature of the activity. They never actively pursued with the department for any clarification on the issue of classification. In the event that the contention of Revenue on taxability of services as alleged in the show-cause notice is upheld, the tax paid for the entire period needs to be paid. The returns filed do not show the full description of the nature of the activities of the appellant and hence, the department came to know about the exact details only on the initiation of the enquiry. In the case of M/s. Six Sigma Soft Solutions (P) Ltd.
Versus Commissioner of Service Tax, Chennai: [2018 (4) TMI 1504
- CESTAT Chennai], where similar issue of taxability of supply of personnel to the IT companies was decided, it was held at para 6.6 that the department was justified in invoking extended period of limitation of five years where the facts came to light only when the department conducted scrutiny of annual reports.
Page 11 of 225. Heard both sides.
5.1 The issues to be decided is whether the appellant is liable to pay Service Tax under the category of 'Manpower Recruitment or Supply Agency Service' and 'Business Auxiliary Service'.
6. Let us examine the definition of "Manpower Recruitment or Supply Agency Service", which is reproduced below:
Section 68: "Manpower Recruitment or Supply Agency' means any [person] engaged in providing any service, directly or indirectly, if any manner for recruitment or supply of manpower, temporarily or otherwise, [to any other person];
6.1. The appellant undertakes 2 types of projects known as "Fixed Price Project" and the "Time and Material Project" to his client M/s. Philips Electronics India Limited and M/s. Yahoo Software Development India Private Limited. The contention of the Revenue is that under the "Time and Material Project" the purchase orders are issued to the appellant for providing software engineers with required technical competency. On the other hand, the appellant argues that there is no difference between both the projects and they are engaged in providing information technology service and in both the projects only ITSS is provided and the Parliament intentionally excluded payment of Service Tax in respect of Information Technology Service prior to 16.05.2008. It is their claim that there is no material difference between the projects and both are in relation to Information Technology Service and therefore, it cannot be considered as 'manpower service'.
6.2. Let's examine the projects. The Master Services Agreement entered into between the appellant and M/s. Philips Electronics India Limited on 7th December 2005 states that the Page 12 of 22 appellant had experience in developing software related to embedded software, device programming, functional verification, system programming and multimedia. It also states that the appellant had sufficient expertise and resources to develop and provide the services specified in the purchase orders in connection with the development of various software/hardware applications.
In the Agreement at clause 1(f) the "Fixed Price Project" is defined as 'a project undertaken for a fixed fee and under which the project is controlled by Aztec the appellant and Deliverables (Items specified in the purchase orders) are specified in the Statement of Work (SOW) for the same'. At clause 1(g) of the same agreement "Time and Materials Project" is defined as 'a project under which Aztec the appellant has provided its personal to provide services on an effort basis and under which the project is controlled by Philips and no Deliverables are specified in the SOW for the same.' From the above definitions, it is very clear that the 'Fixed Price Project' is controlled by the appellant and all the deliverables are specified in the Statement of Work (SOW) while in the case of 'Time and Materials Projects' the appellant only provides personnel where the project is controlled by their client M/s. Philips Electronics India Limited and there are no deliverables specified in the Statements of Work. In view of the above, the appellants claim that both the projects are one and same cannot be accepted.
6.3. From Clause 2(h) of the same agreement under 'Testing and Acceptance', it is seen that in the case of 'Fixed Price Projects' the payments are based on acceptance of the deliverables after testing and subject to payment terms in the Statement of Work (SOW). While the payments in 'Time and Material Projects' billing will be proportionate for resources employed for less than a month and it will commence only after commencement of staff. Under clause 3(b), it is seen that in the case of 'Fixed Price Project's along with the personnel the day-to-day activities are clearly specified in the purchase orders; while in the case of 'Time Page 13 of 22 and Materials Project', the appellant has to only verify the technical and work history of the personnel. And as seen from clause 3(b)(iii), the appellant is to furnish a staffing plan specifying the details of the skills, experience and qualification of the personnel to be assigned to their client. As per Clause 7(a) under payments, it is mentioned that each SOW shall contain either on a fixed fee or time and material terms. In case of 'Fixed Price Projects', the payment is based on the deliverables associated with the relevant milestones as specified in the SOW. However, in the case of 'Time and Material Projects', the payments are monthly for each hour of work actually spent performing the services during such month. As seen from the invoices placed on record, it is seen that in the case of 'Time and Materials Project', the name of the personnel and the number of hours spent by them is specified and against each personnel, the monthly payments are also specified. For instance, in the purchase order No.2006868 dated 22.02.2006, the engineering service charges of Shri Subbarayadu. G is shown as Rs.81,000/- for January 2006 for 20 days and Rs.90,000/- each for February 2006 to April 2006 and in total Rs.3,51,000/- is paid to Shri Subbarayudu. G. Thus, from the above clauses of the Agreement, it is categorically clear that the 'Fixed Price Project' is for software services rendered by the appellant to their client while 'Time Material Project' deals with providing of personnel. Therefore, the claim of the Revenue that this is only a manpower service being provided by the appellant is to be accepted. Even the payment terms also clearly establish that the payments in case of 'Time Material Projects' is only based on the man hours of the personnel supplied by the appellant and hence, there is no doubt that in these projects, the services rendered by the appellant are to be classified as manpower services only.
6.4. The decisions relied upon by the appellant are not relevant as in the case of CIT v. Information Architects (supra), Page 14 of 22 the Hon'ble Supreme Court was dealing with the question whether the assessee was eligible for deduction under Section 80HHE of the Income Tax Act. In the case of Cognizant Tech Solutions (I) Pvt Ltd v. Commissioner (supra), the facts are entirely different as the project undertaken by the appellant therein was to provide for overall management of the project including the specialized functional services as is done in the present case, in the case of 'Fixed Price Projects'. The 'Time Material Projects' clearly proved that it is only a 'man power supply' and the decisions relied upon by the Revenue in the case of M/s. Coromandel Infotech India Ltd. Vs Commissioner of GST & CE, Chennai South (supra) and M/s. Future Focus Infotech Pvt Ltd Vs Commissioner of C.Ex (ST), Chennai-IV (supra) clearly proves that the activities under taken by the appellant fall under the man power supply and the Tribunal has observed as follows:
"12. We find that the arguments advanced on behalf of the appellants are mainly based on the various clauses in the agreements executed between them and their clients namely TCS and Infosys. We are of the view that not only the wordings of these clauses are to be considered but also how different clauses of the contracts actually operate have to be seen. We find that the appellants are supplying various skilled personnel to TCS and Infosys to work on software projects undertaken by TCS and Infosys from their respective clients. The personnel deputed by the appellants appear to be working at the site of the clients of TCS and Infosys or in the premises of TCS and Infosys. There is no evidence produced before us to indicate that any of the software projects undertaken by TCS and Infosys from their respective clients has been sub- contracted to the appellants or that the appellants are working on any such project on their own. What has emerged clearly is that the appellants have deputed skilled personnel including computer engineers to work under the supervision and control of TCS and Infosys personnel in-charge of projects undertaken by TCS and Infosys. The appellants are getting paid in terms of the man hours for the persons deputed to work under the control and supervision of TCS and Infosys."Page 15 of 22
In the instance case as already discussed above, the skilled personnel have been supplied by the appellant to their clients and the payments are also based on the man hours for the persons deputed by the appellant.
6.5. With regard to limitation, the appellant was very well aware that the two projects 'Fixed Price Project' and 'Time Materials Projects' are two different projects under different parameters while one being on the information technology service rendered and other being purely on personnel which has already been discussed above. The department came to know of these details only after DGCEI investigated and got to know about these Agreements and the payment terms. Therefore, the invocation of extended period has been rightly invoked in view of the fact that certain agreements and invoices were not brought to the knowledge of the department. Accordingly, the demand for Rs. 1,12,86,898/- on man power services for the period June 2005 to March 2007 is confirmed along with appropriate interest. The equal amount of penalty under Section 78 of the Finance Act is also upheld. All other penalties are set aside.
7. The second issue is with regard to Service Tax demand on 'Business Auxiliary Services' for the period July 2003 to March 2007. The appellant has entered into 'Master Agreement' and 'Selling Agreement' both dated 01.04.2001 between Aztec Software and Technology Services Ltd. Bangalore and Aztec Software Inc. USA. As per the 'Master Agreement' the company is engaged in the business of providing software and technology relating services to entities within and outside India. And with regard to payments, it is stated that the company shall pay fees for services provided by the service provider based on the actual cost incurred by the service provider in providing the services plus service fee. As per the 'Selling Agreement' placed on record, the company is engaged in the business of providing software and Page 16 of 22 technology related services to entities within and outside India. As per the payment terms, it is stated that for the selling services the company shall pay the agent the actual cost/expenses incurred by the agent in providing he services plus a service commission/fee which shall be computed at 10% of the aggregate actual cost/expenses incurred by the agent, in providing the services. The Commissioner in the impugned order referring to the definition of 'Business Auxiliary Service' states that the overseas service provider has provided the services from abroad to the appellant and the appellant who is in India has received the services is liable to pay service tax as per Section 66A of the Finance Act, 1994. The Commissioner has confirmed the demand in terms of Rule 2(1)(d)(iv) of the Service Tax Rules, which has been disputed by the appellant on the ground that prior to insertion of Section 66A of the Finance Act, 1994, there can be no levy of service tax for the period 01.04.2001 to 17.04.2006 as is held by the Hon'ble High Court of Bombay in the case of Indian National Shipowners Association Vs. UOI (supra), wherein the Hon'ble High Court has held as follows:
"17. Reliance is placed on the provisions of Rule 2(1)(d)(iv) quoted above for justifying the levy of service tax for the period from 16.08.2002. Perusal of the above quoted Rule 2(d)(iv) shows that by that provision a person liable for paying the service tax was defined to mean in relation to any taxable service provided by a person who is non-resident or is from outside India to a person receiving taxable service in India. Apart from the fact that this rule is contrary to the provisions of Section 68 and other provisions of the Act, under this provision the recipient of the service became liable for paying the service tax provided the service was received in India. The entire case of the Petitioners is in relation to the service received by the vessels and ships owned by the members of the Petitioner-association outside India. Therefore, it cannot be said that on the basis of Rule 2(1)(d)(iv), service tax can be levied on the members of the Petitioners-association. It is further to be seen here that Section 64 gives powers to the Central Government to make rules for carrying out the provisions of the Chapter. The chapter relates to taxing the services which Page 17 of 22 are provided, the taxing on the value of the service and it is only the person who is providing the service can be regarded as an assessee. The rules therefore, cannot be so framed as not to carry the purpose of the Chapter and cannot be conflicted with the provisions in Chapter V of the Act. In other words, as the Act makes the person who is providing the service liable, the provisions in the Rules cannot be made which makes the recipient of the service liable. It is, thus, clear that the provisions of Rule 2(1)(d)(iv) are clearly invalid.
18. So far as reliance placed on the notification dated 31-12-2004 for justifying levy of service tax from the members of the Petitioners- association is concerned, that notification has been issued under sub- section (2) of Section 68 of the Act. Sub-section 2 of Section 68 reads as under :-
68(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.
The above provision authorises the Central Government to notify the taxable service, in relation to which the rules can be framed, in relation to such service. By the notification dated 31-12-2004, any taxable service provided by a person who is a non-resident or is from outside India is notified. If Rule 2(d)(iv) is taken to be rule framed pursuant to this provision, then a person who receives taxable service in India from a person who is non-resident or is from outside India becomes taxable and not service rendered outside India by a person who is non-resident or is from outside India. Therefore, levy of service tax from the members of the Petitioners-association from 1-2-2005 (sic) 1-1-2005 cannot be justified.
19. Then reliance is placed on explanation which is added below Section 65(105). That explanation was added by Finance Act, 2005 with effect from 16-6-2005. That explanation reads as under :-
Explanation - For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established Page 18 of 22 a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India, such service shall be deemed to be taxable service for the purposes of this clause.
By this explanation services provided by a non-resident outside India to a person residing in India has been declared to be taxable service. Therefore, though the services provided to the members of the Petitioners-Association outside India becomes taxable service, the charge of the tax continues to be on the provider of service as per the scheme of the Act, and because of the explanation also the Respondents do not get authority of law to levy a service tax in relation to the services rendered to the vessels and ships of the members of the Petitioners-association outside India.
20. It appears that a similar provision in the rules was made applicable by the Government in relation to the Clearing Agents by making customers of the Clearing Agent liable for levy of the service tax. That question has been decided by the Supreme Court by its judgment in the case of Laghu Udyog Bharati (supra) and the Supreme Court has clearly laid down that the imposition of the service tax is on the persons rendering the services and by making a provision in the Rules, levy of tax cannot be shifted to the recipients of the services and the Rule framed which brought about this situation has been declared by the Supreme Court to be invalid. The law laid down by the Supreme Court in its judgment in Laghu Udyog (supra) is squarely applicable to Rule 2(1)(d)(iv), which is relied on in this case. It appears that it is first time when the Act was amended and Section 66A was inserted by Finance Act, 2006 w.e.f. 18-4-2006, the Respondents got legal authority to levy service tax on the recipients of the taxable service. Now, because of the enactment of Section 66A, a person who is resident in India or business in India becomes liable to be levied service tax when he receives service outside India from a person who is non-resident or is from outside India. Before enactment of Section 66A it is apparent that there was no authority vested by law in the Respondents to levy service tax on a person who is resident in India, but who receives Page 19 of 22 services outside India. In that case till Section 66A was enacted a person liable was the one who rendered the services. In other words, it is only after enactment of Section 66A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of Section 66A, there was no such provision in the Act and therefore, the Respondents had no authority to levy service tax on the members of the Petitioners-
association."
The Supreme Court Bench comprising Hon'ble Mr. Justice S.H. Kapadia and Hon'ble Mr. Justice Aftab Alam on 14-12-2009 dismissed the Petition for Special Leave to Appeal (Civil) No. 18932 of 2009 filed by Union of India against Bombay High Court Judgment dated 11-12-2008 in Writ Petition No. 1449 of 2006 in the case of Indian National Shipowners Association v. Union of India and reported in 2009 (13) S.T.R. 235 (Bom.). While dismissing the SLP, the Supreme Court passed following order:
"Heard learned counsel on both sides. The special leave petition is dismissed."
[Union of India v. Indian National Shipowners Association -- 2010 (17) S.T.R. J57 (S.C.)]"
7.1 Based on the above decision of the Hon'ble High Court which was up held by the Supreme Court, subsequently, the Board (CBEC) vide F.No.276/08/2009-CX.8A, dated 26.09.2011 (reproduced below), accepted the above decision of the Hon'ble Supreme Court and rescinded the instructions issued vide F.No.275/7/2010-CX8A dated 30.06.2010, which has been relied upon by the Commissioner in the impugned order.
Instruction F. No. 276/8/2009-CX. 8A, dated 26-9-2011 Government of India Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, New Delhi Subject : Applicability of Service tax on taxable services provided by a non-resident or a person located outside India to a recipient in India - Regarding.
Page 20 of 22Kind attention is invited to instruction F.No. 275/7/2010-CX8A, dated 30-6-2010, wherein the Board had communicated its view that services tax on a taxable service received in India, when provided by a non- resident/person located outside India, would be applicable on reverse charge basis with effect from 1-1-2005, and that the ratio of judgment in M/s. Indian National Shipowners Association (INSA) case [2009 (13) S.T.R. 235 (Bom.)] would not apply to such cases. Further, direction was issued to field formations to defend the levy of service tax on such services for the period on or after 1-1-2005, as post INSA judgment, it has been held by the High Courts/Tribunal in a large number of cases, applying ratio thereof, that service tax on such services is leviable only w.e.f. 18-4-2006. However, the appeals filed by the department before the Hon'ble Supreme Court, for defending the levy of service tax on such services w.e.f. 1-1- 2005, have been dismissed recently (subsequent to the issuance of said instruction dated 30-6-2010) in the following cases.
(i) SLP (C) No. 29539 of 2010 in CCE v. Bhandari Hosiery Exports Ltd. [2010 (20) S.T.R. (J99) (S.C.)]
(ii) SLP (C) No. 18160 of 2010 in CST v. Unitech Ltd.
(iii) SLP (C) No. 34208/09 of 2010 in UOI v. S.R. Batliboi & Co.
(iv) SLP (C) No. 328/332 of 2011 in UOI v. Ernst & Young
(v) SLP (C) No. 25687-25688/2011 in CCE v. Needle Industries
(vi) SLP (C) No. 25689-25690/2011 in UOI v. SKM Engg. Products Further, Review Petition No. 1686 of 2011 filed in the case of Bhandari Hosiery has also been dismissed by the Hon'ble Supreme Court vide order dated 18-8-2011.
2. In view of the aforementioned judgments of the Hon'ble Supreme Court, the service tax liability on any taxable service provided by a non- resident or a person located outside India, to a recipient in India, would arise w.e.f. 18-4-2006, i.e., the date of enactment of Section 66A of the Finance Act, 1994. The Board has accepted this position. Accordingly, the instruction F.No. 275/7/2010-CX8A, dated 30-6-2010 stands rescinded.
3. Appropriate action may please be taken accordingly in the pending disputes.
7.2 In view of the above, the demand for the period 1.04.2001 to 17.04.2006 cannot be sustained.
7.3 The appellant has not denied that the services have been received from their overseas company but only submits that for the period prior to 17.04.2006 they are not liable to pay duty for the reasons discussed above. For the period from 18.04.2006 to March 2007, the appellant submits that since the definition of 'Business Auxiliary Service' does not include information technology services, the demand of Service Tax under RCM for the Page 21 of 22 above period cannot be sustained. There is no finding in the impugned order with regard to this plea taken by the appellant. Therefore, since the demand from 18.04.2006 to March 2007 is within the normal period, the same is remanded to the Commissioner to redetermine the tax liability after taking into consideration the submissions of the appellant that the Business Auxiliary Service excludes information technology service.
7.4 Accordingly, we confirm the demand amounting to Rs.1,12,86,898/- for 'Manpower Recruitment and Supply Agency Service' along with equal amount of penalty under Section 78 of the Finance Act. The demand on Business Auxiliary Service for the period July 2003 to 17.04.2006 is set aside along with interest and all other penalties. For the period 18.04.2006 to March 2007 the matter is remanded to the Commissioner only for redetermination of service tax on Business Auxiliary after affording the appellant a reasonable opportunity of being heard.
8. The appeal is disposed of on above terms.
(Order pronounced in Open Court on 03.07.2024.) (D.M. MISRA) MEMBER (JUDICIAL) (R. BHAGYA DEVI) MEMBER (TECHNICAL) rv Page 22 of 22